Managing an investment vehicle

ABSTRACT

A method for managing an investment vehicle. The investment vehicle issues multiple debt instruments to a plurality of investors. The debt instruments have different liability characteristics. The proceeds of the debt instruments are invested in assets. From time to time, liabilities on the debt instruments and the credit quality of the assets is reevaluated, to ensure that the cash flows generated by the portfolio, disregarding fair market value of the assets, will be sufficient to pay timely principal and interest on the liabilities based on the evaluation criteria of two different rating agencies. In response to the reevaluating, the capital structure of the investment vehicle is adjusted to maintain a desired agency rating for the debt instruments.

RELATED APPLICATION DATA

This application claims priority from U.S. provisional application Ser.No. 60/577,047, “Managing An Investment Vehicle,” filed Jun. 4, 2004,herein incorporated in its entirety by reference.

BACKGROUND

This invention relates to the practice, administration, or management ofan enterprise, or the processing of financial data.

Investment vehicles obtain investments from investors, and then investthe proceeds in assets that will generate cash flows. Some portion ofthe cash flows from the assets is then paid to the investors.

SUMMARY

In general, in a first aspect, the invention features a method formanaging an investment vehicle. The investment vehicle issues multipledebt instruments to a plurality of investors. The proceeds of the debtinstruments are invested in a portfolio of assets. From time to time,liabilities on the debt instruments and the credit quality of the assetsare reevaluated, to ensure that the cash flows generated by theportfolio, disregarding fair market value of the assets, will besufficient to pay timely principal and interest on the liabilities basedon evaluation criteria of two different rating agencies. In response tothe reevaluating, the capital structure of the investment vehicle isadjusted to maintain a desired agency rating for the debt instruments.

In a second aspect, the invention features a method for managing aninvestment vehicle. The investment vehicle issues multiple debtinstruments to a plurality of investors. The debt instruments havedifferent liability characteristics. The proceeds of the debtinstruments are invested in assets. From time to time, liabilities onthe debt instruments and the credit quality of the assets arereevaluated, to ensure that the cash flows generated by the portfolio,disregarding fair market value of the assets, will be sufficient to paytimely principal and interest on the liabilities. In response to thereevaluating, the capital structure of the investment vehicle isadjusted to maintain a desired agency rating for the debt instruments.

In a third aspect, the invention features a method for managing aninvestment vehicle. The investment vehicle issues multiple debtinstruments to a plurality of investors. The debt instruments havedifferent liability characteristics. The proceeds of the debtinstruments are invested in assets. From time to time, liabilities onthe debt instruments and the credit quality of the assets arereevaluated, to ensure that the cash flows generated by the portfoliowill be sufficient to pay timely principal and interest on theliabilities based on evaluation criteria of two different ratingagencies. In response to the reevaluating, the capital structure of theinvestment vehicle is adjusted to maintain a desired agency rating forthe debt instruments.

In a fourth aspect, the invention features method for investing. Atleast one debt instrument from an investment vehicle is purchased, andpayment is received from the investment vehicle. The investment vehicleissues multiple debt instruments to a plurality of investors. The debtinstruments have different liability characteristics. The proceeds ofthe debt instruments are invested in assets. From time to time,liabilities on the debt instruments and the credit quality of the assetsare reevaluated, to ensure that the cash flows generated by theportfolio, disregarding fair market value of the assets, will besufficient to pay timely principal and interest on the liabilities. Inresponse to the reevaluating, the capital structure of the investmentvehicle is adjusted to maintain a desired agency rating for the debtinstruments.

In a fifth aspect, the invention features method for investing. At leastone debt instrument from an investment vehicle is purchased, and paymentis received from the investment vehicle. The investment vehicle issuesmultiple debt instruments to a plurality of investors. The debtinstruments have different liability characteristics. The proceeds ofthe debt instruments are invested in assets. From time to time,liabilities on the debt instruments and the credit quality of the assetsare reevaluated, to ensure that the cash flows generated by theportfolio will be sufficient to pay timely principal and interest on theliabilities based on evaluation criteria of two different ratingagencies. In response to the reevaluating, the capital structure of theinvestment vehicle is adjusted to maintain a desired agency rating forthe debt instruments.

Embodiments of the invention may include one or more of the followingfeatures. The reevaluating of liabilities may include calculatingestimated default rates for the debt instruments, simulating default andinterest rate scenarios, and/or determining a required capital structurefor maintaining the desired agency rating. The debt instruments maydiffer from each other in maturity date, issue date, payment seniority,or agency rating. The debt instruments may be issued through a publicoffering or through a private placement, or a private placement toqualified investors. The reevaluation may be performed essentially eachbusiness day, on some other periodic, fixed, schedule, when a creditsupport aspect of the portfolio changes, when new debt instruments areissued or retired.

The above advantages and features are of representative embodimentsonly. It should be understood that they are not to be consideredlimitations on the invention as defined by the claims. Additionalfeatures and advantages of the invention will become apparent in thefollowing description, from the drawings, and from the claims.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a schematic diagram of an investment vehicle.

FIG. 2 is a flow chart of determining capital structure requirements.

DESCRIPTION

I. Overview

Referring to FIG. 1, investment vehicle 100 may offer debt instruments122 of one or more classes (e.g., in a public offering or by privateplacement) secured by a portfolio of collateral 102. Particularly incases where the amounts due on debt instruments 122 fluctuates over time(because of rolling issue and retirement of debt instruments 122,currency fluctuations, differing amounts, etc.), the liabilities ofinvestment vehicle 100 to repay debt instruments 122 may change overtime. Similarly, the quality (including credit quality, among otherfeatures) of a given asset in portfolio 102 may change over time, andthe assets in collateral portfolio 102 may change as investments arebought or sold out of portfolio 102 by the fund managers. Debtinstruments 122 issued by investment vehicle 100 may be issued andretired, and assets in portfolio 102 may be purchased from and sold onmarket 110. Thus, the estimated default and loss risk of the entiretransaction may change over time. To support a given rating from one ofthe credit rating agencies (Standard & Poor's, Moody's Investor Servicesor Fitch Ratings, Inc.) for one or more of debt instruments 122,investment vehicle 100 may analyze its portfolio 102 from time to time,for example daily, to assess capitalization 104 needed to maintain thedesired rating. For example, a computer model of collateral portfolio102 may determine a default ratio of portfolio 102, and that model maybe run with a number of differing assumed scenarios. Using the result ofthat model under the scenarios, capitalization 104 of investment vehicle100 may be managed to maintain a funding level, asset level, and/orasset credit quality to support a desired default profile and/or creditrating under all (or a selected fraction) of the assumed scenarios. Inother alternatives, portfolio 102 may be managed so that the totalportfolio 102 maintains the desired default profile or rating level.

Credit support provider or guarantor 130 may transfer capital 104 in andout of investment vehicle 100 as necessary to maintain the desiredcredit rating.

Investment vehicle 100 may be managed based on the cash flows generatedby those assets and/or based on the fair market value of the assets. Inan investment vehicle managed solely for the cash flows of the assets,the credit quality of an asset may be evaluated based on the cash flowsgenerated by the asset. For example, the spread on a particular assetmay change due to a macro event such as a terrorist attack, but thecredit quality of the asset may not be affected, leaving its ratingunaffected. Such an asset may be valuable collateral in a cash-flowmanaged investment vehicle, and less valuable in a investment vehiclemanaged based on fair market value. Generally, the cash flow of a givenasset is less subject to rapid fluctuations than its fair market value.

This structure may be used in investment vehicle 100 that does not havea fixed capitalization structure. For example, investment vehicle 100may offer debt instruments 122 to investors, and in turn invest theproceeds in securities 102. Investment vehicle 100 may requireadditional capital to be contributed as needed from credit supportprovider 130, in order to maintain a capitalization 104 orover-collateralization ratio that supports the desired rating for debtinstruments 122. This allows the capitalization structure of investmentvehicle 100 to be managed over time as investment vehicle 100's assetportfolio and liabilities change. This management may allow capital tobe employed more efficiently, which may increase returns to investors.

Debt instruments 122 issued by investment vehicle 100 may vary from eachother in a number of respects. For example, debt instruments 122 may beissued at different dates, bear differing maturities, or the cash flowsmay be tranched among debt instruments 122 at differing priorities. Debtinstruments 122 may bear different interest rates, some of which may befixed, while others may be floating, while others may have a step-upyield or other variable yield characteristic. Debt instruments 122 maybe denominated in differing currencies. Investment vehicle 100 mayadjust its capitalization 104 according to its portfolio makeup, whichis dynamic. In some cases, investment vehicle 100 may issue a singleclass of debt instruments 122 to all investors.

The form of investment vehicle 100 may include a collateralized bondobligation, a collateralized debt obligation, a collateralized loanobligation, or other structured investment vehicle. Credit supportprovider 130 may be a sponsor of investment vehicle 100, a guarantor, orother source of capital.

II. Collateral and Capitalization

The investment fund may invest in securities as specified by theagreements between the investment vehicle 100 and its investors 120.Depending on any limits specified in agreements between investmentvehicle 100, guarantor 130 and investors 120, investment vehicle 100 mayinvest in fixed income instruments (including, but not limited to,corporate loans and bonds, Government bonds, leases, Mortgage BackedSecurities (MBS), Commercial Mortgages, Commercial Mortgage BackedSecurities (cmbs), Asset backed securities (abs), Equipment Trustcertificates (ETC, EETC), Collateralized Loan Obligations (CLO),Collateralized Debt Obligations (CDO), and default swaps), equities,real estate, derivatives, insurance contracts, or any other asset. Theseagreements may require investment vehicle 100 to maintain its fundinglevel and capital at a certain level. That level may be stated, forexample, as the portfolio balance+cash−liabilities, or as the ratio ofthat value to the portfolio balance.

As the credit quality of the assets in the portfolio changes, and as theliabilities on debt instruments 122 change, credit support provider orguarantor 130 may be required to contribute further capital so thatinvestment vehicle 100 maintains a “safety margin,” so that investmentvehicle 100 as a whole can withstand a specified default profile orexpected loss rate in order to maintain a specified credit rating. Thissafety margin may generally be set out in an indenture betweeninvestment vehicle 100, its investor 120 and credit support provider130, and may be stated in terms of a computer model calculation based ondefault ratio or expected loss rates (see §III, below), and/or anover-collateralization ratio. Conversely, the credit quality of theassets and the liabilities on debt instruments 122 may change so thatcapital may be withdrawn from investment vehicle 100 while maintainingthe safety margin required to meet the specified credit rating, allowingcapital to be used more efficiently.

Generally, portfolio 102 may be managed so that the cash flows generatedby portfolio collateral 102 will be aligned with the maturities of debtinstruments 122.

Capital 104 may be supplied by the credit support provider 130 asequity, subordinated debt, a guarantee, or in other forms.

III. Computer Models and Analyses

In one implementation, the following four software components may beused to run a daily analysis of required capitalization:

-   Fund Manager: A database system, in this case called “Fund Manager,”    may maintain information on the collateral underlying portfolio 102.    This database may be updated continually on a real time basis to    track (a) the contents of the underlying collateral portfolio 102,    and (b) the respective interest rates, maturities, amortization    schedules, ratings, S&P Industry Sectors, portfolio break-down by    asset type and the market price for each asset in portfolio 102.-   CDO Evaluator: A financial model provided by Standard & Poor's (S&P)    for the purpose of estimating the default risk of collateral    portfolio 102 (securing a “collateralized debt obligation,” or    “CDO”), as it may be modified by S&P in connection with its    confirmation of the ratings of debt instruments 122, and as may be    further modified from time to time by S&P. The CDO evaluator is    available to any client that contracts S&P to rate a product (see    www.securitization.net/pdf/sp_cdo_(—)111502.pdf). The CDO Evaluator    calculates an SDR (“scenario default rate”) for a specific portfolio    of collateral 102. The SDR states the percent of default in    portfolio 102 but does not calculate the timing of defaults or the    loss severity associated with a default. The following components    are used to evaluate varying timing and severity assumptions:    -   Dynamic Capital Optimizer (DCO): The DCO determines the required        funding consistent with the desired rating for any class of debt        instruments 122 for which investment vehicle 100 has a targeted        rating (for example S&P “AAA” for the senior debt instruments,        and lower ratings, or ratings by other agencies, for other debt        instruments). The DCO may calculate and simulate different        default and interest-rate trend scenarios using the SDR from the        CDO evaluator and the Cash Flow Model, varying (i) the timing        with which the defaults occur, (ii) the prepayment speed of the        underlying collateral and (iii) interest rates. The DCO uses        actual collateral portfolio 102 as of any point in time and the        actual debt instruments 122 that exist on any day taking into        account the terms of each debt instrument 122 outstanding. The        DCO calls the Cash Flow Model (see next paragraph) iteratively        in order to calculate the capital or required funding needed in        order to pass each scenario. The highest required funding from        any scenario becomes the required funding amount, which        investment vehicle 100 is required to maintain on any given day        in order to reduce any amortization of the transaction.    -   Cash Flow Model: A conventional cash flow model that generates        the principal and interest cash flows from collateral portfolio        102, and applies the cash flows to the liabilities, both their        principal and interest, in order to satisfy that the principal        and interest on each debt instrument 122 will be paid on a        timely basis when due.

As shown in FIG. 2, the required funding level may be calculated asfollows:

-   Step 1—Run Fund Manager 200 in order to generate tables that    describe collateral portfolio 102 and respective data for a specific    day.    -   Inputs: Data in the database that includes descriptive        information on the terms of each piece of collateral and daily        trading information.    -   Outputs:        -   (FMT1 (“Fund Manager Table”)) Table that has every            individual principal payment that contractually is required            to be made as well as the Security, Rating, Industry, Timing            associated with the payment.        -   (FMT2) Table that has aggregated principal payments going            out over time for collateral portfolio 102 grouped into            subportfolios based on whether the collateral is (i) fixed            or floating rate; loans, bonds, Mortgage Backed Security,            Asset Backed Security or synthetics; Secured or Unsecured;            and Senior or Subordinated.        -   (FMT3) Table that has the total amounts in each subgrouping            above as well as the percentage of the total collateral            portfolio 102 and the respective weighted average interest            rate.-   Step 2—Run the S&P CDO Evaluator 210.    -   Inputs: FMT1    -   Process: S&P CDO Evaluator 210 performs the functions described        above.    -   Outputs: Table of SDRs 212 for different rating levels going up        to AAA-   Step 3—Run DCO 220.    -   Inputs:        -   (1) FMT2        -   (2) FMT3        -   (3) A table that specifically describes each debt instrument            122 currently outstanding or to be issued by the investment            vehicle 100. For example, this table may describe the            amount, coupon, maturity, amortization, and other attributes            of each debt instrument 122. This table may be generated            manually, and maintained as debt instruments 122 are issued            or retired.        -   (4) The SDR generated in step 2 for the given rating being            sought.    -   Process: DCO 220 evaluates a number of default scenarios and        interest rate scenarios, for example twenty combinations, that        assume different timing for defaults and different interest rate        trends to the SDR calculated in Step 2. The default scenarios        are described in paragraph [0025] below, and the interest rate        scenarios are described in paragraph [0026].        -   Within each default-rate scenario combination, the DCO            iteratively calls Cash Flow Model 222 to evaluate the level            of capital required to pass the scenario. Each iteration            applies Cash Flow Model 222 to the collateral portfolio,            “Input Table (3)” from the above list (the descriptions of            the debt instruments 122), and a given level of            capitalization. One each iteration, Cash Flow Model 222            determines whether that level of capitalization passes the            scenario. The iterative calls of Cash Flow Model 222            continue until the amount of capital required to pass the            scenario has been determined within a specified tolerance.            After DCO 220 has finished all the required scenarios it            then determines which needs the highest amount of capital.            The maximum capital becomes the required amount. DCO 220            finishes by calculating how much capital can be taken out of            investment vehicle 100, or how much has to be put in, to            have optimal capitalization 104. Capital may be taken out as            cash.    -   Outputs: Table 230 that has        -   (a) the required capital for each scenario.        -   (b) the minimum required capital for investment vehicle 100            to pass all scenarios and thereby maintain the desired            ratings. This minimum required capital is the maximum            capital computed by the iterative application of the            scenarios.        -   (c) the amount of capital that can be taken out of            investment vehicle 100 by credit support provider 130 if            there is too much capital or the amount of capital that must            be put into investment vehicle 100 if there is too little            capital.

Recall that the SDR (“scenario default rate”) does not state the timingof defaults. Currently, to give an “AAA” rating, S&P supplies fourdefault timing scenarios that make varying assumptions of this timing.S&P requires that these scenarios be applied to the SDR, and passed, inorder to achieve the AAA rating. S&P's current example set of scenariosis as follows, though others may be applicable in other circumstances:

Default Patterns Percent of SDR to be applied Scenario 1 Scenario 2Scenario 3 Scenario 4 Year 1 40% 25% 15% 20% Year 2 30% 25% 30% 20% Year3 20% 25% 30% 20% Year 4 10% 25% 15% 20% Year 5 10%  0% 10% 20%For example, scenario 1 assumes that 40% of all defaults that will occurover the entire life of the portfolio occur in year 1, 30% in year 2,20% in year 3, etc. (Note that each scenario column sums to 100%.). In afifth scenario (not supplied by S&P), there are 0% defaults and 0%prepayments in each year. This fifth scenario protects againstliabilities on notes 122 that come due before cash flows mature fromcollateral 102.

Each of these Default patterns is tested with the portfolio and SDR fourtimes, each time with a different LIBOR assumption. The four LIBORvectors are—LIBOR Up, LIBOR Down, LIBOR Up/Down, LIBOR Forward. Hencethere are altogether twenty (five default patterns×four LIBOR vectors)different scenarios that are tested.

In another implementation, investment vehicle 100 agrees with investors120 to maintain a credit rating specified by a rating agency other thanS&P, using a portfolio credit evaluation model 260 for rating collateralportfolio 102 specified by that agency. For example, the rating agency,or an investment bank, may have developed a function for a set ofvariables 250 (the values of which are based upon data from collateralportfolio 102) that determines a minimum level of capital 270 necessaryto maintain a desired credit rating. For example, capitalization 270 maybe a function 260 of the average rating of the individual assets inportfolio 102, diversity of those assets, weighted average life,weighted average recovery rate, average loss severity, and/or netmargin. As another example, a rating agency may have developed a map ofvalues from a set of variables 250 to a capitalization value, so that a“best fit” search of the map based on collateral portfolio 102 specifiesthe minimum level of capital 270. Once the minimum level of capital 270is determined, capital may then be added or removed from investmentvehicle 100 to meet the minimum capital requirements.

In yet another implementation, rating methods of two or more agenciesmay be combined to calculate the amount of required capital. Forexample, investment vehicle data may be processed through S&P CDOEvaluator 210 and DCO 220 to determine the capitalization necessary tomaintain a desired S&P rating. Similarly, investment vehicle data may beprocessed through the financial model 260 of another rating agency todetermine the capitalization necessary to for investment vehicle 100 tomaintain a desired credit rating for that agency. Capitalization 104 ofinvestment vehicle 100 may then be adjusted based on the higher of thetwo capitalization determinations.

For the convenience of the reader, the above description has focused onrepresentative samples of all possible embodiments, a sample thatteaches the principles of the invention and conveys the best modecontemplated for carrying it out. The description has not attempted toexhaustively enumerate all possible variations. Other undescribedvariations or modifications may be possible. For example, where multiplealternative embodiments are described, in many cases it will be possibleto combine elements of different embodiments, or to combine elements ofthe embodiments described here with other modifications or variationsthat are not expressly described. Many of those undescribed variations,modifications and variations are within the literal scope of thefollowing claims, and others are equivalent.

A portion of the disclosure of this patent document contains materialthat is protected by copyright. The copyright owner has no objection tothe facsimile reproduction of the patent document or the patentdisclosure as it appears in the Patent and Trademark Office file orrecords, but otherwise reserves all copyright rights whatsoever.

1. A method for managing an investment vehicle, comprising the steps of:investing the proceeds of multiple debt instruments in assets havingassociated credit qualities, the debt instruments being issued from theinvestment vehicle to a plurality of investors and having differentliability characteristics; from time to time, reevaluating liabilitieson the debt instruments and the credit quality of the assets, to ensurethat cash flows generated by the assets, disregarding fair market valueof the assets, will be sufficient to pay timely principal and intereston the liabilities based on evaluation criteria of two different ratingagencies; and in response to the reevaluating, adjusting a capitalstructure of the investment vehicle to maintain a desired agency ratingfor the debt instruments; wherein, at least one of the reevaluating andthe adjusting is performed using a computer.
 2. A method for managing aninvestment vehicle, comprising the steps of: investing the proceeds ofmultiple debt instruments in assets having associated credit qualities,the debt instruments being issued from the investment vehicle to aplurality of investors and having different liability characteristics;from time to time, reevaluating liabilities on the debt instruments andthe credit quality of the assets, to ensure that cash flows generated bythe assets, disregarding fair market value of the assets, will besufficient to pay timely principal and interest on the liabilities; andin response to the reevaluating, adjusting a capital structure of theinvestment vehicle to maintain a desired agency rating for the debtinstruments, wherein, at least one of the reevaluating and the adjustingis performed using a computer.
 3. The method of claim 2, whereinreevaluating liabilities further comprises the steps of: calculatingestimated default rates for the debt instruments; simulating default andinterest-rate scenarios; and determining a required capital structurefor maintaining the desired agency rating.
 4. The method of claim 2,wherein the debt instruments differ from each other in maturity date. 5.The method of claim 2, wherein the debt instruments differ from eachother in issue date.
 6. The method of claim 2, wherein the debtinstruments differ from each other in payment seniority.
 7. The methodof claim 2, wherein the debt instruments differ from each other inagency rating.
 8. The method of claim 2, wherein the reevaluation occurson a periodic, fixed schedule.
 9. The method of claim 8, wherein theperiodic reevaluation is performed essentially each business day. 10.The method of claim 2, wherein the reevaluation is performed when acredit support aspect of the assets changes.
 11. The method of claim 2,wherein the reevaluation is performed when new debt instruments areissued.
 12. The method of claim 2, wherein the reevaluating of theliabilities is based on evaluation criteria of two different ratingagencies.
 13. A method for managing an investment vehicle, comprisingthe steps of: investing the proceeds of multiple debt instruments inassets having associated credit qualities, the debt instruments beingissued from an investment vehicle to a plurality of investors and havingdifferent liability characteristics; from time to time, reevaluatingliabilities on the debt instruments and the credit quality of theassets, to ensure that cash flows generated by the assets will besufficient to pay timely principal and interest on the liabilities basedon evaluation criteria of two different rating agencies; and in responseto the reevaluating, adjusting a capital structure of the investmentvehicle to maintain desired agency ratings for the debt instruments;wherein, at least one of the reevaluating and the adjusting is performedusing a computer.
 14. The method of claim 13, wherein reevaluatingliabilities further comprises the steps of: calculating estimateddefault rates for the debt instruments; simulating default andinterest-rate scenarios; and determining a required capital structurefor maintaining the desired agency rating.
 15. The method of claim 13,wherein the debt instruments are issued through a public offering. 16.The method of claim 13, wherein the debt instruments are issued througha private placement.
 17. The method of claim 16, wherein the debtinstruments are issued through a private placement to qualifiedinvestors.
 18. The method of claim 13, wherein the reevaluation occurson a periodic, fixed schedule.
 19. The method of claim 18, wherein theperiodic reevaluation is performed essentially each business day. 20.The method of claim 13, wherein the reevaluation is performed when newdebt instruments are issued.
 21. The method of claim 13, wherein thereevaluation is performed when debt instruments are retired.
 22. Themethod of claim 13, wherein the reevaluating of the liabilitiesdisregards fair market value of the assets.